For many investors, waiting for central bank policy to pivot towards a more accommodative stance after a period of tightening has felt like watching a kettle that never boils.
The impact of this pent-up anticipation is seen in the markets as rallies come and corrections quickly follow. In 2024, investors will continue to fixate on the next steps of central bank policy but what is different to last year is that a pivot is likely, however, when and by how much is still up for debate.
2024 has also been called “the year of elections” as 50 countries and almost 40% of the world population are headed to the polls, creating heightened risks in both politics and the global markets.
With all this in mind, a persistent high interest rate environment, increased volatility, and cautious equity markets are likely to drive securities lending opportunities this year. It is also likely that we will continue to experience a significant concentration of demand in key sectors such as consumer discretionary, real estate, and alternative energy vehicles.
Overall, we expect 2024 will create increased opportunities as it relates to securities lending and drive additional value to asset lenders. We also expect a revival in deal making activity which should drive opportunities for asset lenders.
U.S.: We expect there will be pockets of borrower demand in the energy vehicle and pharmaceutical sectors.
Europe: The real estate sector will likely be in focus as high interest rates take hold.
Asia: Securities lending opportunities in Japan may increase as investors continue to reallocate investment to the country and deal activity is likely to continue.
Let’s look at the 2023 influences that we expect will continue to impact opportunities across each region:
North America Dominates Global Lending Revenues
The culmination of strong “hard to borrow” securities such as Sirius, Beyond Meat, and Lucid combined with deal name activity resulted in a record year for U.S. equities in 2023, making up half of global equity returns. Associated revenues topped out at $5.1 billion representing an increase of approximately 7% year over year.1
Separately, the following corporate restructurings contributed to significant lending revenues:
- AMC’s conversion of preferred equity shares into common stock drove demand to borrow. A long-awaited ruling from Delaware courts resulted in an extended period of borrower demand, ultimately making AMC the most lucrative lending opportunity in recent history.2
- Johnson & Johnson split-off of Kenvue Inc., its consumer health arm, in August through an exchange offer, boosting revenues. Through the offer, Johnson & Johnson shareholders could exchange their Johnson & Johnson common stock for Kenvue common stock at an approximately 7% discount. Organic demand, combined with supply instability, drove demand on this lending opportunity which in turn boosted Q3 2023 revenues.
- A protracted regulatory approval delayed a tender offer which would convert VMWare stock into AVGO stock and allowed the spread in the trade to balloon. The lucrative spread ultimately drove record revenues on this deal to close out 2023.
2023 was also a banner year for U.S. corporate bond lending. The rising rate environment created robust demand for borrowing. Rising yields compressed bond prices (which increased demand), and household borrowing has increased.
APAC Sees Robust Demand
APAC lending demand was broadly robust with strong levels of activity seen across several markets:
- Japan: Equities rallied, partly spurred by strong foreign inflows and a reallocation of investment away from China, which in turn contributed to an increase in directional trading activity. High profile share sales by Japan Post Bank and Rakuten Group, tender offers by JMDC Inc. and Intage Holdings, as well as continued directional demand in the shipping sector helped drive strong lending returns.
- Hong Kong: Amid bear markets, escalating U.S.- China tensions, and slower than expected growth in China there was active lending interest in the autos/electric vehicles (EV) manufacturing, and technology sectors. We also saw interest in Chinese property and real estate firms, with the latter driven by mounting concerns over sluggish demand and developers’ ability to meet debt repayments. From a securities lending perspective, China Evergrande, Country Garden Holdings, East Buy Holdings, Nio Inc., and Sunac China were of interest.
- South Korea: We witnessed an increase in tender offers in H1 2023, which helped spur strong lending returns in securities such as Meritz Securities and SM Entertainment. A robust retail-investor driven rally in South Korean EV battery manufacturers witnessed strong lending demand in firms such as Ecopro, Ecopro BM, and L&F Co. However, the implementation of a full short selling ban from November 2023 until the end of June 2024 dampened lending sentiment towards the end of the year.
- Taiwan: With geopolitical tensions increasing across the Taiwan Strait as well as slowing demand for AI chip equipment, PCs, and notebooks, we saw broad lending demand in the semiconductor and technology sectors. Airlines and shippers such as China Airlines, Eva Airways, Evergreen Marine, and Yang Ming Marine were in focus on concerns over inflation and reduced shipping rates.
EMEA Adapts to Higher Rate Environment
We witnessed a volatile year with companies having to adapt in a higher interest rate environment coupled with continued geopolitical concerns. Securities lending maintained strong demand in H1 2023 across key sectors such as industrials (Oesterreichische Post, SAS, SGL Carbon, and Varta) and consumer services & discretionary products (ASOS, Basic Fit, and Cineworld). The real estate sector also brought in strong lending returns with Aroundtown, Immofinanz, and Samhallsbyggnadsbolaget.
An unusual long equity bias in H2 2023 and declining GDP led to reduced directional activity from hedge funds. However, there were pockets of strong revenue from corporate action trading via rights issues as companies that struggled with higher interest rates sought funding to shore up balance sheets. In addition, notable cash/share tender offers in demand during 2023 were Autogrill, Bollore, Koninklijke DSM, Deliveroo, Exor, RHI Magnesita, Software, and Fomento de Construcciones y Contratas S.A.
1S&P Global Securities Finance Q4 2023 Snapshot.
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